Edited version of your written advice

Authorisation Number: 1012885047056

Date of advice: 1 October 2015

Ruling

Subject: Whether there is an obligation to withhold PAYG from staff payments

Question

Is there an obligation to withhold from payments made to staff under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes

This ruling applies for the following periods

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on

1 July 2015

Relevant facts

The entity uses the services of staff that provide services.

All staff have identical duties and conditions however a number of the staff are paid as employees and the other staff are treated as contractors. The staff who are paid as employees have PAYG amounts withheld and also have superannuation guarantee paid on their behalf where the amount of pay requires it. They submit timesheets for the hours worked. The staff who haven't been treated as employees submit invoices based on hours worked.

No training is provided for staff members however, each staff member is paid a small amount which is a proportion of actual costs for professional development each year.

Preparation work is done anytime the staff member chooses.

Events are intermittent. A small number of regular events for the next year are set at the end of the previous year and staff are expected to be available for these events, but could refuse a particular event particularly if they are unavailable. For other events, sometimes the decision for the entity to perform is accepted depending on staff availability. Sometimes performances are accepted and staff are replaced if not available.

Time off for staff, if required, does require prior notice so that alternative arrangements can be made for replacement staff. Staff would normally ask if it is ok to take time off. Usually, though, this would only occur for reasons that were unavoidable. Activities for which services are required only occur for certain parts of the year and staff are able to arrange holidays and other events to coincide with scheduled holidays. Usually if one of the staff is unavailable for a particular event, they would inform the co-ordinator and they would discuss ways to manage the events and whether other staff can cover the absence or external replacements are required. Particularly in the case of illness, where notice is often short, rearrangements to the schedule are made to cover the missing staff member.

The staff are expected to perform the work personally as they are chosen for their specific skills and experience and delegation or substitution is not appropriate.

If the staff member was sick or went on holidays, depending on the circumstances, a joint discussion would normally be conducted about who would cover the work. For short notice illnesses, usually the entity would arrange with other staff to cover the gap. For occasions with longer absences either the staff member would suggest an alternative and either make the arrangements themselves or if they were unable to make the arrangements, ask another staff member or the entity to make other arrangements. The choice of a substitute would usually result from a discussion with all staff combined with availability of potential substitutes. The particular skills required for this work limits the pool of candidate substitutes.

Usually if there is a short term occurrence of a particular staff member not being able to attend events other staff could cover for the staff member by rearranging of schedules. The remuneration of both staff members would be adjusted accordingly. If an external person is required the staff member might make the arrangements, but the entity would pay the substitute directly on their invoice.

When conducting events staff are representing the entity and not their own business. However all staff members have chosen to work with the entity because of their particular talents and in this capacity, they undertake other work for other organisations or privately. All staff have other employment.

Staff have team meetings once per term and all staff are expected to attend. The time and place for these meetings is mutually agreed upon. More senior staff are required to attend other meetings.

The staff are expected to attend regular weekly events at set times but complete paid preparation and administration at a time of their choosing. They are also required to prepare for, and attend performances, workshops and camps at other times. The content of the events is left to the discretion of the staff.

The work of the staff is not monitored or supervised in any regular or formal sense. One staff member monitors the work of the other staff in the sense of gauging the outcomes of the end product.

Staff provide the majority of their equipment and materials and are reimbursed for consumables used by the entity. The entity doesn't provide computers, phones or vehicles and the staff are expected to use their own equipment without reimbursement.

The entity owns a material library which is at the disposal of the staff, but they regularly prepare and utilise items from outside this library.

Staff cannot sub-contract their work without prior approval as they have been chosen for their specific skills.

The entity first establishes a relationship with the staff through word of mouth and through industry association advertisements.

It appears that there are no employment/engagement contracts in place, however all staff have agreed that they understand that they will be paid at a set hourly rate for events, a set but different hourly rate for weekly preparation, and additional amounts which are agreed at the time for other events.

The staff are not paid for sick leave, holidays, workers compensation or any form of allowance (although a travel allowance may be possible).

The entity is responsible for public liability and workers compensation insurance which covers not only staff but also the other members of the entity. Staff member do not bear any business risk.

If an event was cancelled at short notice, the entity wouldn't expect to pay the staff member for that time unless they had actually attended the venue and then it would be a reduced amount.

It is expected that a certain period's notice would be given to a staff member if there was some kind of negligence, dereliction of duty or some other misdemeanour. If there was an issue with the quality of the staff member's work it is likely that the staff member would be terminated within a certain period of time.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 to Schedule 1

Income Tax Assessment Act 1997 Section 960-100

Reasons for decision

Under section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that entity or another entity).

An 'entity' is defined under section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust, a superannuation fund and an approved deposit fund.

Where section 12-35 of schedule 1 of the TAA refers to an employee, the reference is to an employee at common law.

There is no one factor that determines whether a person is an employee or an independent contractor. A number of factors must be considered.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship). Such a relationship is typically contrasted with the independent contractor/principal relationship that, at law, is referred to as a contract for service. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result).

An independent contractor works in his or her own business (or his or her own account) while an employee works in the service of the employer that is in the employer's business.

Whether a payee is considered to be engaged as an employee or as an independent contractor for taxation purposes is a question of fact that is looked at on a case by case basis.

Factors in deciding the relationship

The first consideration must be the terms of the contract. At all times, the underlying consideration is whether the worker is working:

• in the service of another, as an employee, or

• on their own behalf, as an independent contractor.

Taxation Ruling TR 2005/16 provides guidance on the types of factors to be considered in each case. These features, which are discussed below, have traditionally been regarded by the courts as indicators to assist in determining the true nature of the contract.

The control test
The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment.

The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. In fact, a high degree of direction and control is not uncommon in contracts for services. The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract otherwise the contractor is free to exercise his or her discretion (subject to any terms implied by law). This is because the contractor is working for himself or herself.

Under a contract of service, on the other hand, the employer has an implied right within the limits imposed by industrial relations laws, to direct and control the work of an employee. This is because the employee is working in the employer's business and the owner of a business has the right (within the confines of applicable law) to manage that business as the owner sees fit. The High Court stated that what matters is lawful authority to command, so far as there is scope for it. The more control that is held over the person performing the work, the more likely it is that the person will be an employee.

In this case it appears that there is no current written agreement between the entity and staff members. However, all staff agree, and understands, that they will be paid at a set hourly rate for certain events, a different set hourly rate for weekly preparation and a set amount for other events. Staff are engaged as a result of word mouth or from industry association advertisements. Staff are expected to attend various meetings on a regular basis. The time and place for these meetings is mutually agreed upon. Staff are also expected to attend regular weekly events at set times. It appears that ultimately the entity has authority over all staff, even though individual staff members have free rein to apply their skills. Staff members will usually ask if it is ok for them to take time off.

Results test

In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. Conversely, under a contract of service, payment is not necessarily (but may be) dependent on the completion of specified services.

Here all staff members are paid on an hourly basis except for the odd occasion when there are events when the staff are paid a set amount for the event. For the vast majority of the engagement of the staff they are not paid for a 'result' but for their labour on an hourly basis.

Delegation test

The power to delegate was considered to be an important factor in deciding whether a person is an employee or an independent contractor. An unlimited power to delegate work is an important indication that the service provider is an independent contractor.

Here all staff are engaged to perform the work personally as they are chosen for their specific skills and experience and delegation or substitution is not appropriate, however if a staff member chooses to delegate their duties they must seek permission.

Conditions of engagement
Provision of paid leave entitlements, for example, sick leave, long service leave and superannuation are persuasive indicators of an employment relationship.

It should be noted that there is no standard set of indicators applicable to an employee and a different set applicable to an independent contractor. Most conditions of engagement when viewed individually are equivalent as indicators of the true character of the relationship.

Here staff are not entitled to any sick leave, annual leave or any form of allowance, although a travel allowance may be possible. Staff are representing the entity and not any other entity including any business a staff member may be operating. The entity is responsible for public liability and workers compensation insurance. It is expected that a certain period's notice would be given if there was some kind of negligence, dereliction of duty or some other misdemeanour. If there was an issue with the quality of a staff member's work it is likely that the staff member would be terminated at the end of a certain period.

Hours of work and mode of payment
An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work.

Here the time and date of events are set by the entity. Each staff member however prepares at a time of their choosing. Staff are paid a set fee for events and if an event was to be cancelled it is envisaged that the entity wouldn't pay the staff member for that time unless they had actually attended the venue and then they would be paid a reduced amount.

Business risk and expenses
Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being independent. Typically, a worker who derives piece rate payment and sustains large outgoings would be so exposed.

The higher the proportion of the gross income which the worker is required to expend in deriving that income, and the more substantial the assets which the worker brings to his or her tasks, the more likely it is that the contract is for services.

Here staff members bear no cost for public liability insurance or workers compensation as the entity covers them.

Place of performance
Workers under a contract of service will generally perform the tasks on the payer's premises using the payer's assets and equipment. A contractor, on the other hand, generally provides all their own assets and equipment.

Here events are conducted on a regular basis during a certain period of the year. Staff provide the majority of their equipment and materials and are reimbursed for consumables used by the entity. The entity owns a product library which is at the disposal of the staff, but staff regularly provide and utilise products from outside the library. The entity sets very broad guidelines and within those guidelines the staff chooses the material to utilise.

Integration
The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate that the worker is an integral part of the business.

Here it appears that the staff are integrated into the entity's business. A number of staff perform the same functions for the entity. The day to day running of the entity is handled by the staff.

Other factors

The entity pays each staff member a small amount for their professional development and the staff supply their labour to the entity.

Conclusion

From the information supplied it is considered that all staff members are employees of the entity and therefore there is an obligation under section 12-35 of Schedule 1 to the TAA to withhold from payments made to all staff members.